PrefBlog

There was good news from Canadian inflation:

The Consumer Price Index (CPI) rose 4.3 per cent in March from a year earlier, down from February’s 5.2-per-cent pace, Statistics Canada reported on Tuesday. The slowdown was widely anticipated and matched financial analysts’ predictions.
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Even so, the short-term trend has noticeably cooled off. Expressed at an annualized rate, the three-month change in core inflation (excluding food and energy) was 3.1 per cent in March, down from 3.4 per cent in February. It had peaked at more than 8 per cent in May, 2022.
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Gasoline prices fell nearly 14 per cent over the past year, although they were up 1.2 per cent from February. The price of durable goods rose 1.6 per cent in March on a 12-month basis, slowing from a 3.4-per-cent gain in February.

There have also been slight improvements in the grocery sector: Those prices rose 9.7 per cent over the past year, down from increases of more than 11 per cent in recent months.

On the flip side, mortgage interest costs have surged by 26.4 per cent over the past year, rising from February’s gain of nearly 24 per cent. “This was the largest yearly increase on record as Canadians continued to renew and initiate mortgages at higher interest rates,” Statscan said in its release. Excluding these costs, the CPI rose 3.6 per cent over the past 12 months.

The New York Fed released its Business Leaders Survey:

Activity in the region’s service sector continued to decline modestly, according to firms responding to the Federal Reserve Bank of New York’s April 2023 Business Leaders Survey. The survey’s headline business activity index was little changed at -9.8. The business climate index moved down nine points to -47.7, suggesting the business climate remains much worse than normal. Employment levels were unchanged, representing the first time in two years that employment has not increased. Wage increases moderated noticeably, and input and selling price increases slowed. Looking ahead, firms do not expect conditions to improve over the next six months.

The Bridging Finance story is getting even more interesting:

In a lawsuit filed with the Ontario Superior Court, PricewaterhouseCoopers Inc., the receiver, alleges that “throughout KPMG’s tenure, the Bridging funds materially misrepresented the value of their assets and financial performance. KPMG negligently failed to detect and report on these misstatements.”
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Early last year, PwC estimated that investors will lose $1.3-billion, meaning almost two-thirds of Bridging’s $2.09-billion in assets under management have vanished – one of the largest collapses of an investment manager in Canadian history.

PwC increased that estimate to $1.4-billion in its new lawsuit, and it blames KPMG. ”The Bridging funds are insolvent, and KPMG is liable for the liquidation deficit.” PwC argues the shortfall “would have been avoided if KPMG had conducted the audit competently and in accordance with applicable standards.”

OSFI has released its Annual Risk Outlook for 2023-2024:

Today, the Office of the Superintendent of Financial Institutions (OSFI) released its Annual Risk Outlook (ARO) for 2023-24, a publication that outlines what OSFI sees as the most significant risks facing Canada’s financial system in the upcoming year. The ARO also informs Canadians about the actions OSFI will take in response to these risks.

OSFI’s Annual Risk Outlook for 2023-24 identifies the following key risks:

• Housing Market Downturn Risk
• Liquidity and Funding Risk
• Commercial Real Estate (CRE) Risk
• Transmission Risk from the Non-bank Financial Intermediaries (NBFI) sector
• Corporate and Commercial Credit Risk
• Digital Innovation Risk
• Climate Risk
• Cyber Risk
• Third Party Risk

As the risk environment that Canadian financial institutions operate in changes, OSFI will be reliably open and transparent about the supervisory and regulatory actions it takes in response.

A download is available from the press release page.

And, it’s been a long time, but there can be penalties for deliberate lies:

The judge in the Fox News defamation case said on Tuesday that the case was resolved, abruptly ending a long-running dispute over misinformation in the 2020 election just as a highly anticipated trial was about to begin.

It was a last-minute end to a case that began two years ago and after the disclosure of hundreds of thousands of pages of documents that peeled back the curtain on a media company that has long resisted outside scrutiny. The settlement included a $787.5 million payment from Fox, according to Justin Nelson, a lawyer for Dominion.
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Another election technology company, Smartmatic, filed a $2.7 billion defamation lawsuit against Fox in February 2021, accusing the news network of falsely implicating the company in a bogus narrative about vote rigging in the 2020 election.

“Dominion’s litigation exposed some of the misconduct and damage caused by Fox’s disinformation campaign,” a Smartmatic spokesman said in a statement on Tuesday. “Smartmatic will expose the rest.”

Smartmatic said in its complaint that Fox knowingly aired more than 100 false statements. A day after the suit was filed, Fox Business canceled the show of Lou Dobbs, who was named as a defendant.

There was an interesting post on Financial Wisdom Forum today:

I have in mind to add one or two perpetuals to our portfolio. There are quite a number of choices. I decided to only look at those with P1 credit ratings. Question is how to choose between shares with similar yields? My gut feel is to buy those with lower price and coupon rate. Interested in any comments.

Just for fun, I asked Bing and ChatGPT. Bing never seemed to understand question and kept telling me to sort on credit rating (they were the same!). ChatGPT gave a very comprehensive answer. More or less confirmed my feeling, but did encourage me to go look at the prospectus! (I will, once I have a short list)

This is the up to date list sorted and extracted from my Google Sheets spreadsheet:

He makes a transcript of the ChatGPT interaction in a later post. The machine did a pretty good job!

I must say, I don’t quite understand what is going on at Emerge:

The Toronto-based company, which manages about $118-million in assets, owes a total of $2.53-million across six of its Emerge ARK funds, a group of investment funds that are sub-advised by prominent U.S. investor Cathie Wood.

The total amount owed was first disclosed in 2019, the year Emerge entered the Canadian ETF industry with the launch of the ARK funds. At that time, Emerge owed $486,442 to five ETFs. By the end of 2021, the debt had grown to $1.12-million and was spread across six ETFs. Six months later, by June 30, 2022, the figure had jumped 127 per cent to $2.53-million.

The amounts owed to the funds are money that was “pre-paid” to Emerge for managing the ETFs, according to a note in the funds’ 2019 annual financial statements. Emerge said the money was used to cover operating expenses for the funds, a cost that is typically paid directly by a fund manager when first launching an ETF or mutual fund, in order to keep management fees low for investors.

It is unconventional for an investment manager to use money from inside an investment fund to prepay the fund manager. And it is even more unusual for a manager to carry a balance owing, year-over-year, with accrued interest for operating expenses, as Emerge did.

However, it always does my heart good to learn of trouble at private mortgage companies:

Romspen Investment Corp., one of Canada’s largest private mortgage lenders, is locked in a court battle with its largest borrower after multiple loan defaults allegedly totalling $333-million – unpaid debt that has hindered its ability to fund investor redemptions.

Romspen has asked the Ontario Superior Court to appoint a receiver to take control of three properties that underpin the distressed loans. If approved, the receiver could sell the properties as it sees fit and the proceeds would allow Romspen to recoup some, or all, of the money it is owed. The three affected properties are located in Toronto: Woodbine Mall and Rexdale Mall, in the city’s northwest corner, and 1500 Birchmount Rd., in the city’s northeast corner.

The borrower, Issa El-Hinn, also known as Chris Hinn, is a commercial real estate investor and businessman. He originally defaulted on multiple Romspen loans in 2018, according to court filings, but signed a forbearance agreement with the lender at the time and has since sold six properties, remitting $222-million worth of proceeds to Romspen. The alleged $333-million still owed to Romspen is over and above the $222-million already remitted.

BIS has released a working paper by Claudio Borio, Marc Farag and Fabrizio Zampolli titled Tackling the fiscal policy-financial stability nexus:

Focus
Despite the great strides made by policy reforms following the Great Financial Crisis, the link between fiscal policy and financial stability has attracted less attention. We review the channels through which fiscal and financial risks propagate and mutually reinforce each other and suggest how policy could best tackle these links.

Contribution
We provide a holistic perspective on the fiscal policy-financial stability nexus, also involving monetary and prudential policies. In doing so, we highlight the importance of both protecting the financial system from the sovereign and protecting the sovereign from the financial system.

Findings
We make a number of policy recommendations. First, policymakers need to consider the risks of financial instability when deciding on the size of fiscal buffers and measuring cyclically adjusted fiscal positions. Second, policymakers should continue to make progress towards reducing the favourable treatment of debt versus equity. Finally, in prudential regulation, more could be done to ensure that capital and liquidity requirements better reflect banks’ sovereign exposures. Similarly, it will be important to recognise the role of non-bank financial intermediation in the broader nexus between fiscal policy and financial stability.

Abstract
Tackling the fiscal policy-financial stability nexus is essential to ensure financial and hence macroeconomic stability. In this paper, we review the literature on this topic and suggest how policy could best tackle the link. Doing so involves action on two fronts. First, incorporating financial stability considerations in the design of fiscal policy. This means, in particular, considering the risk of financial crises when assessing fiscal space, recognising the flattering effects of financial booms on fiscal positions and removing or reducing fiscal incentives to private debt accumulation. Second, acknowledging that domestic currency-denominated public debt is not fully risk-free in the design of the prudential regulation of financial institutions. This calls for carefully balanced risk-sensitive capital charges or other measures to limit banks’ sovereign exposures with due regard to the special role of government bonds in the financial system and country-specific characteristics. That said, prudent regulation cannot substitute for fiscal prudence.
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Based on data available at the end of 2018, the approach finds that the fiscal costs linked to possible future crises estimated based on those factors are significant (Graph 4). The expected average fiscal cost is within a range of 5–30% of GDP for advanced economies, with a cross-country average of 20%. The range is similar for emerging markets and less developed economies, although the cross-country average is lower. At the tail of the distribution, the fiscal losses can be substantial. On average across advanced economies, the 95th quantile is approximately 38% of GDP and the 99th quantile exceeds 40%.

Comparing estimates of these fiscal cost with typical estimates of fiscal space for OECD countries (eg Fournier and Fall (2017), Fournier and Bétin (2018)) suggests that the available space should be sufficient to absorb the cost of the crisis for most, but not all, economies in our sample.23 However, these measures of fiscal space are likely to overstate the true amount of space available as they do not consider several sources of uncertainty. In the case of EMEs, considering the calculations of, for instance, Ganiko et al (2016) which account for various sources of uncertainty, fiscal sustainability in a number of countries looks vulnerable in the case of serious financial stress.

Any estimate of a fiscal cost is inevitably subject to a very high degree of uncertainty due to the method used, data availability and the impossibility of incorporating all relevant information. For this reason, the method proposed by Borio, Contreras and Zampolli (2020) is intended to be just one input in what is a much more complex decision. In particular, the method does not take into account the probability of a crisis; only the fiscal cost given a crisis. In addition, the estimates of fiscal cost might not capture the full benefits of the financial reforms following the GFC. These have not just raised bank capital, but also improved its quality and robustness, introduced liquidity standards, implemented macroprudential frameworks and put in place specific arrangements to ensure the orderly resolution of systemically important banks (BIS (2018), Borio, Farag and Tarashev (2020)). Finally, large estimates of the ex ante fiscal cost do not imply that the best solution is necessarily or exclusively of a fiscal nature: prudential regulation is always an essential part of the solution (see below).

The New York Fed has released the March SCE Labor Market Survey:

• The average full-time offer wage received in the past four months increased to $62,088 from $59,834 in November 2022.
• Satisfaction with wage compensation, non-wage benefits, and promotion opportunities at current jobs all declined.
• The average reservation wage—the lowest wage respondents would be willing to accept for a new job—rose to a new series high of $75,811. The increase was driven by respondents above age 45 and those with at least a college degree.
• Conditional on expecting an offer, the average expected annual salary of job offers in the next four months declined to $58,710 from a series high of $61,187 in November 2022.
• For those who are currently employed, the expected likelihood of moving to a new employer and moving to unemployment in the next four months increased to 12.5 percent and 2.5 percent, respectively. This increase was driven by men and respondents without a college degree.

RBC (US) got into some trouble over churning:

RBC Wealth Management-U.S. was censured and ordered to pay almost $1.1 million over allegations it failed to properly supervise brokers’ sales of syndicate preferred stock, according to a Financial Industry Regulatory Authority settlement finalized on Friday.

Between January 2017 and December 2018, nearly 40 RBC brokers engaged in unsuitable short-term trading of syndicate preferred shares that generated unnecessary commissions while often resulting in losses for customers, according to Finra.

RBC’s supervisory system failed to flag the preferred stock sales because it “employed no alerts specific to preferred stock” and more general trading alerts were not tailored to pick up on short-term preferred trades, Finra said. RBC thus violated the regulator’s rules requiring a “reasonably designed” supervisory system, according to the settlement.

OSFI has announced:

The Office of the Superintendent of Financial Institutions (OSFI) and the Global Risk Institute (GRI) today jointly released a report on the ethical, legal, and financial implications of artificial intelligence (AI) on financial services institutions.

The partnership between OSFI and GRI created the Financial Industry Forum on Artificial Intelligence (FIFAI) which gathered Canada’s financial services experts from industry, government and academia on the application of AI. The rapid growth in digitalization and usage of AI across the financial services industry highlighted how current AI risk management frameworks must adapt to remain relevant, forward-looking, and responsive to industry needs. As the use of AI technologies continues to evolve, the need for guiding principles became apparent. The FIFAI discussions then led to the development of the EDGE principles, Explainability, Data, Governance and Ethics:

Explainability enables customers and relevant stakeholders to understand how an AI model arrives at its conclusions.
Data leveraged by AI allows financial institutions to provide targeted and tailored products and services to their customers or stakeholders. It also improves fraud detection, enhances risk analysis and management, boosts operational efficiency, and improves decision making.

Governance ensures a framework is in place that promotes a culture of responsibility and accountability around the use of AI in an organization.

Ethics encourages financial institutions to consider the broader societal impacts of their AI systems.

The full report has been made available.

Bonds were very weak today, as economic news filtered through:

On Thursday, the March producer price index declined by 0.5% month-over-month, while economists had expected the measure to remain flat. That followed Wednesday’s lower-than-expected reading on consumer prices.

Weekly jobless claims, meanwhile, came in at 239,00 for the week that ended April 8, above views for 235,000.

Today’s news was similar:

But a slew of mixed economic data including retail sales, industrial production and consumer sentiment cemented expectations that the Fed will hike rates another 25 basis points at next month’s policy meeting.

“Industrial production and capacity utilization came in stronger than expected,” Bruno added. “Both point to an economy that still has some vibrancy, which gives Fed cover to continue its rate hike policy in May possibly into June.”

Those expectations were underscored by Atlanta Fed President Raphael Bostic, who said another 25 basis point hike could allow the Fed to end its tightening cycle, even as Chicago Fed President Austan Goolsbee called for the central bank to be prudent.

At last glance, financial markets have priced in a 74% likelihood of that happening, according to CME’s FedWatch tool.

BIS published a paper by Biliana Alexandrova Kabadjova, Anton Badev, Saulo Benchimol Bastos, Evangelos Benos, Freddy Cepeda- Lopéz, James Chapman, Martin Diehl, Ioana Duca-Radu, Rodney Garratt, Ronald Heijmans, Anneke Kosse, Antoine Martin, Thomas Nellen, Thomas Nilsson, Jan Paulick, Andrei Pustelnikov, Francisco Rivadeneyra, Mario Rubem do Coutto Bastos and Sara Testi titled Intraday liquidity around the world:

Focus
Banks typically make large payments to each other through large-value payment systems (LVPS). Most LVPS settle payments on a gross basis, which means that banks must fund each payment one by one. While this helps to reduce any credit risk that arises if payments are accumulated and settled on a net basis, it is liquidity-intensive, because banks need to cover any mismatches between incoming and outgoing payments by drawing on their reserves or central bank credit lines. This gives rise to strategic behaviour in how banks manage their intraday liquidity. In this paper, we use a unique cross-country data set to assess intraday liquidity usage by banks around the world.

Contribution
This paper is the first to assemble a data set of payments activity, intraday liquidity usage and institutional characteristics covering LVPS in nine major economies over a long period of time, including the 2007–09 financial crisis. The data let us analyse the effects of the institutional characteristics of an LVPS on intraday liquidity usage, including the effect of so-called liquidity-saving mechanisms (LSM) that many LVPS introduced in the last two decades. As such, this study is valuable for payment system policy makers and operators seeking to update or develop new LVPS and for payment system overseers and bank supervisors that assess intraday liquidity usage in LVPS.

Findings
How banks manage their intraday liquidity depends on the availability and cost of intraday liquidity and LVPS design features. Banks coordinate and recycle their payments less when reserves are higher and the opportunity cost of holding reserves increases. Payment timing, coordination and the resulting level of liquidity efficiency also vary with incentives for early payment submission and specific LSM design features. Such features include the criteria and algorithms used to prioritise/deprioritise or offset payments in a payment system queue. Another key insight is that banks appear to condition their payment behaviour on specific design features, which may weaken some of the features’ intended liquidity-saving effects.

Abstract
We study intraday liquidity usage and its determinants using a unique cross-country data set on large-value payments. We document that the amount of intraday liquidity that financial institutions around the world use each day equals, on average, 15% of their total daily payment values or 2.8% of their countries’ GDP. We then define and calculate system-level measures of liquidity efficiency and inequality in liquidity provision. We show that these measures vary systematically with the degree of payment coordination among payment system participants, the quantity and opportunity cost of central bank reserves and institutional characteristics, such as incentives for early payment submission and liquidity saving mechanism (LSM) design. Our results are consistent with the notion that payment system participants behave strategically and manage intraday liquidity actively. Participants also appear to condition their payment behaviour on specific LSM characteristics, which may weaken some of the LSMs’ intended effects.

The Bank of Canada has released a Staff Working Paper by Alistair Macaulay and Wenting Song titled Narrative-Driven Fluctuations in Sentiment: Evidence Linking Traditional and Social Media:

This paper studies the role of narratives for macroeconomic fluctuations. We micro-found narratives as directed acyclic graphs and show how exposure to different narratives can affect expectations in an otherwise standard macroeconomic model. We capture such competing narratives in news media’s reports on a US yield curve inversion by using techniques in natural language processing. Linking these media narratives to social media data, we show that exposure to a recessionary narrative is associated with a more pessimistic sentiment, while exposure to a nonrecessionary narrative implies no such change in sentiment. In a model with financial frictions, narrative-driven beliefs create a trade-off for quantitative easing: extended periods of quantitative easing make narrative-driven waves of pessimism more frequent, but smaller in magnitude.
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We collect news articles devoted to an economic event and use topic models from natural language processing to extract narratives surrounding the event. We obtain empirical estimates of both the prevailing narratives and each article’s reliance on the narratives. Using these narratives, we provide empirical evidence on the importance of narratives for sentiment fluctuations. To isolate the effects of narratives, we focus on an episode of yield curve in version in 2019–—a popular recession indicator in the US with a nebulous theoretical foundation. Two competing narratives emanate from major news outlets: a “recession” narrative that links the inverted yield curve to an imminent recession, and a “nonrecession” narrative that makes no such connection.

Using these identified narratives, we provide empirical evidence on the importance of narratives for sentiment fluctuations. To isolate the effects of narratives, we focus on an episode of yield curve in version in 2019–—a popular recession indicator in the US with a nebulous theoretical foundation. Two competing narratives emanate from major news outlets: a “recession” narrative that links the inverted yield curve to an imminent recession and a “nonrecession” narrative that makes no such connection.

Our main analysis studies the effects of narratives on the readers who are exposed. The most novel part of our data is the link from narratives in newspaper coverage to rich social network data from Twitter, which allows us to measure the spread of narratives. We use retweeting activities on Twitter to trace whether a Twitter user has engaged with news articles containing certain narratives. We find that after users are exposed to the recessionary narrative, their posted tweets display a more pessimistic sentiment, while exposure to the more neutral, nonrecessionary narrative has no such effect. The drop in sentiment following engagement with a recessionary narrative is persistent, remaining significant 30 days after the retweet. In addition, we apply our empirical framework to study recent inflation narratives. We document the rising prevalence of a narrative that emphasizes the connection of inflation to the real economy. Such a narrative is associated with sentiment declines during high inflation periods.
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Formalizing narratives as directed acyclic graphs, we show that certain groups of narratives will, in fact, have exactly the same effect on expectations. In the context of the inversion of the US yield curve in 2019, the distinguishing feature between a “recession” narrative and a “nonrecession narrative” is, therefore, whether there is a link connecting the inverted yield curve with an upcoming recession.\

Standard tools from topic modeling in natural language processing are well suited to making this distinction. We do this in a large corpus of articles from traditional news media, which is a key source of macroeconomic narratives (Andre et al., 2022b). Linking these articles with rich data on Twitter activity, we find that engaging with an article advancing a “recession” narrative causes a significant and persistent decline in the sentiment of that Twitter user, as embodied in their other activity on the social media site at the time. In contrast, engaging with a “nonrecession” narrative has no such effect on sentiment. This is precisely what would be predicted by models in which viral narratives affect aggregate behavior by shifting expectations. It also suggests a powerful role for the media in influencing aggregate sentiment (highlighted, for example, in Nimark, 2014).

We confirm this aggregate implication in a quantitative model informed by our empirical results. Yield curve inversions cause declines in expected incomes among households holding narratives in which such events are linked to recessions. This implies that extended periods of quantitative easing generate two novel offsetting effects: by flattening the yield curve, they make such narrative-driven fluctuations in sentiment more frequent. However, they
also reduce the prevalence of the “recession” narrative, reducing the magnitude of those fluctuations.

Another BoC Staff Working Paper by Ajit Desai, Zhentong Lu, Hiru Rodrigo, Jacob Sharples, Phoebe Tian and Nellie Zhang was titled From LVTS to Lynx: Quantitative Assessment of Payment System Transition:

Modernizing Canada’s wholesale payments system to Lynx from the Large Value Transfer System (LVTS) brings two key changes: (1) the settlement model shifts from a hybrid system that combined components of both real-time gross settlement (RTGS) and deferred net settlement (DNS) to an RTGS system; (2) the policy regarding queue usage changes from discouraging it to encouraging the adoption of the new liquidity-saving mechanism. We utilize this unique opportunity to quantitatively assess the effects of those changes on the behaviour of participants in the high-value payments system. Our analysis reveals the following: (1) At the system level, most payments are settled in a single stream with the liquidity-savings mechanism in Lynx—facilitating liquidity pooling and leading to higher efficiency than LVTS where payments were distributed in two streams. Moreover, due to Lynx’s liquidity-saving mechanism, many payments arrive earlier than those in LVTS, providing more opportunities for liquidity saving at the cost of slightly increased payment delay. (2) At the participant level, the responses are rather heterogeneous; however, our analysis suggests that liquidity efficiency is improved for several participants, and most experience slightly longer payment delays in Lynx than in LVTS.

François Villeroy de Galhau, Governor of the Bank of France, gave a speech titled How central banks should face instability and fragmentation:

French and European banks benefit from a well-diversified and profitable business base, be it on the deposits or on the credit side, unlike SVB. The increase in interest rates has even started to boost their net interest income, which grew by 12.7 % in 2022 at the twenty main Euro area banks – this should also raise questions over the alleged trade off between price stability and financial stability.

This trade off is a fashionable idea at the moment, but I find it overdone. The goals are not necessarily incompatible, and we have separate instruments to achieve them. For the great majority of European banks, higher interest rates are beneficial. If however action were needed on financial stability, this would be effected chiefly through temporary liquidity instruments, which would not conflict with the increase in interest rates needed to ensure price stability.

Be they energy price pressures or financial spill-overs, the challenges currently faced by central banks require more than individual actions – they call for strong and effective multilateral impetus. I say it here in Washington, during the IMF Spring Meetings.

However, the tide has been turning the other way since the Russian invasion of Ukraine. As geopolitical rifts deepen and trust fades, it is becoming more and more difficult for the G20 to deliver on its mandate, despite remarkable efforts from the Indonesian and now the Indian presidency. We need to find pragmatic ways forward to overcome deadlocks in global action and adapt to the new realities.

Alternatives to multilateral cooperation, such as regionalism, “minilateralism”,ii or “polylateralism”iii can usefully supplement it. Working on smaller scales, or relying on non-state actors could help achieve breakthroughs. Yet they cannot replace it. They lack the global reach of international state cooperation.iv Hence my call for a focused or pragmatic multilateralism. v The principle is simple: rather than pursuing an exaggerated ambition, focus at present multilateral efforts on a few selected global issues, where there are clear common interests. In my view, without pretending to be exhaustive, these global issues on which interests and deliverables could converge encompass the following three “Cs”: climate, crypto-assets, cross-border payments.

The BoC has released a Staff Working Paper by Andrew Glover and Jacob Short titled Demographic Origins of the Decline in Labor’s Share:

Since 1980, the earnings share of older workers has risen in the United States. At the same time, labor’s share of income has declined significantly. We hypothesize that an aging workforce has contributed to the decline in labor’s share of income. We formalize this hypothesis in an onthe-job search model in which employers of older workers may have substantial monopsony power due to the decline in labor market dynamism that accompanies aging. The greater monopsony power manifests as a growing wedge between a worker’s earnings and their marginal product over the life cycle. We estimate the profile of these wedges using crossindustry variation in labor’s share and the age distribution of earnings. We find that a 60-yearold worker receives half the marginal product relative to when they were 20. Together with recent demographic trends, this can account for 59% of the recent decline in labor’s share of earnings in the United States.

And the BoC has released a Staff Working Paper by Stephen Ayerst, Faisal Ibrahim, Gaelan MacKenzie and Swapnika Rachapalli titled Trade and Diffusion of Embodied Technology: An Empirical Analysis:

Using data from patents, citations, inter-sectoral sales and customs, we examine the international diffusion of technology through imports of sectoral knowledge and production inputs. We construct measures of the flow of technology embodied in imports. These measures are weighted by inter-sectoral knowledge and production input-output linkages that capture the relevance of this technology for generating new innovations in different sectors in importing countries. We develop an instrumental variable strategy to identify the causal effects of technology embodied in imports on innovation and diffusion outcomes. For sectors in importing countries, increases in both knowledge- and production-weighted embodied technology imports lead to technology diffusion (measured using backward citations in new patent applications) and increases in the rate of new innovations (measured using the forward citations those patents receive). Effects are substantially larger for knowledge-weighted imports of embodied technology, which also lead to improvements in the average quality of new innovations.

The BoC kept the policy rate steady:

The Bank of Canada today held its target for the overnight rate at 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is also continuing its policy of quantitative tightening.

Inflation in many countries is easing in the face of lower energy prices, normalizing global supply chains, and tighter monetary policy. At the same time, labour markets remain tight and measures of core inflation in many advanced economies suggest persistent price pressures, especially for services.

Global economic growth has been stronger than anticipated. Growth in the United States and Europe has surprised on the upside, but is expected to weaken as tighter monetary policy continues to feed through those economies. In the United States, recent stress in the banking sector has tightened credit conditions further. US growth is expected to slow considerably in the coming months, with particular weakness in sectors that are important for Canadian exports. Meanwhile, activity in China’s economy has rebounded, particularly in services. Overall, commodity prices are close to their January levels. The Bank’s April Monetary Policy Report (MPR) projects global growth of 2.6% this year, 2.1% in 2024, and 2.8% in 2025.

In Canada, demand is still exceeding supply and the labour market remains tight. Economic growth in the first quarter looks to be stronger than was projected in January, with a bounce in exports and solid consumption growth. While the Bank’s Business Outlook Survey suggests acute labour shortages are starting to ease, wage growth is still elevated relative to productivity growth. Strong population gains are adding to labour supply and supporting employment growth while also boosting aggregate consumption. Housing market activity remains subdued.

As more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year. Softening foreign demand is expected to restrain exports and business investment. Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year. This implies the economy will move into excess supply in the second half of this year. The Bank now projects Canada’s economy to grow by 1.4% this year and 1.3% in 2024 before picking up to 2.5% in 2025.

CPI inflation eased to 5.2% in February, and the Bank’s preferred measures of core inflation were just under 5%. The Bank expects CPI inflation to fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024. Recent data is reinforcing Governing Council’s confidence that inflation will continue to decline in the next few months. However, getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize. As it sets monetary policy, Governing Council will be particularly focused on these indicators, and the evolution of core inflation, to gauge the progress of CPI inflation back to target.

In light of its outlook for growth and inflation, Governing Council decided to maintain the policy rate at 4½%. Quantitative tightening continues to complement this restrictive stance. Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Mark Rendell comments in the Globe:

The bank’s updated inflation forecast is little changed from January. It expects the annual rate of inflation to drop to around 3 per cent by the middle of the year, from 5.2 per cent in February. Inflation is then expected to decline gradually to 2 per cent by the end of 2024.

Meanwhile, the bank revised its GDP growth forecast to reflect the resilience of the Canadian economy at the start of the year. It now expects 1.4 per cent GDP growth in 2023, up from 1 per cent forecast in January. It downgraded its 2024 GDP growth forecast to 1.3 per cent from 1.8 per cent.
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The annual rate of consumer price index inflation peaked at a four-decade high of 8.1 per cent last June. It has fallen steadily since then, thanks to lower energy prices and a slowdown in durable goods inflation as global transportation costs have receded.

Service price inflation is proving stickier. This is closely tied to the ongoing tightness in labour markets, which is pushing up wages.
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“The limited tightening in financial conditions due to the recent banking sector stress has been embedded into the base case,” the bank said in its Monetary Policy Report, published Wednesday.

“However, if global banking stresses intensify further, global credit conditions could tighten significantly. If this risk materializes, a more severe global slowdown and sharply lower commodity prices could follow.”

The Office of the Comptroller of the Currency (OCC) has released its Interest Rate Risk Statistics Report:

This report provides statistics for different bank populations. The OCC calculated exposures and risk
limits for the most commonly modeled target accounts in different interest rate stress scenarios. The
OCC also calculated key NMD assumptions for different NMD types. This report provides tables with
statistics on

• • projected changes in 12-month net interest income (NII) in parallel interest rate shock scenarios ranging from –200 basis points to +400 basis points.
• • projected changes in economic value of equity (EVE) in parallel interest rate shock scenarios ranging from –200 basis points to +400 basis points.
• • banks’ policy limits for changes in NII and EVE in parallel interest rate shock scenarios ranging from –200 basis points to +400 basis points.
• • NMD repricing rates and average lives for different account types.

…
The statistics in this report are based on data from 899 banks. The as-of date of the data ranges from March 31, 2021, to December 31, 2022.

Andrew Bailey, Governor of the Bank of England, gave a speech:

Moving on, let me now point to an area where we are at risk of contradicting ourselves. I said that assured value was a key principle of digital money. How does this fit with the idea that we could resolve failed banks and allow deposits (inside money) to take a haircut? One answer is that it depends on the size of the deposit above a certain threshold. The idea behind deposit protection is to set a level below which the assurance of value holds, and above which it does not. Practice, I would suggest, points to the difficulty of this principle.

In seeking to solve too big to fail we have tackled this problem by requesting an additional slice of subordinated liabilities which can explicitly bear losses by being converted into equity in the event of a resolution. I’m not talking here about AT1 securities, but what comes further up the hierarchy – what in Europe we call ‘Eligible Liabilities’. The point is that for large banks we have reinforced the assurance of deposits by requiring a bigger cushion of loss absorbing liabilities.

But smaller banks find it harder to issue marketable long-term debt securities that can count as Eligible Liabilities. I think the answer here lies in the world of deposit insurance.

The US authorities have announced a review of their deposit insurance system. In the UK, the Bank is also considering improvements to our approach to depositor pay-outs for smaller banks which do not have Eligible Liabilities. Our work has thus far focused on the speed of pay-outs. Going further and considering increasing deposit protection limits could have cost implications for the banking sector as a whole. As with all things relating to bank resolution, there is no free lunch.
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Given the increase in bank regulation required in the aftermath of the financial crisis, it is not surprising that the last decade has seen a relative and absolute increase in non-bank finance.

Continuing the theme developed earlier, one important way to look at the bank versus
non-bank world is that in the former there is assurance on the value of money as the main liability of banks, while in the latter the value of investments explicitly and deliberately is not assured.

This is important, but we also have to recognise that the growth of non-bank finance has led to the significant expansion of the landscape of systemic risk since the crisis.

In other words, we have seen that the non-bank world can transmit risk into the bank world, and other parts of the core of the financial system, like central counterparties. Consequently, the relative focus of our financial stability work has shifted to the risks posed by non-bank financial institutions (NBFIs).

Moreover, we have seen a common theme running through incidents that have occurred – the dash for cash in 2020, the Archegos Collapse, the LDI pension fund issue, the nickel metals case – namely that for firms to understand and respond to the full risk implications they would have had to observe and respond to a much larger picture of risks than they did observe, and from that came potentially larger risks.

There is a challenge of breadth and depth in the NBFI world. It is a very large and disparate landscape with many activities and entities. As a result, we have to survey a lot of ground to look out for risks. But in order to understand these risks, we need to get into the detail, hence the depth issue. LDI was a good case study of this. The LDI fund world comprised 85% of the larger so-called segregated funds, and 15% of the smaller pooled funds. Our stress testing work focussed on the 85%, but the problem arose in the 15%.

In some ways the issues around NBFI bear a striking resemblance to ages old challenges in finance, such as leverage, and inter connectivity with other parts of the financial system, creating the scope for spill-overs and systemic consequences. But the heterogeneity of the landscape means that there is no single magic number for leverage as we have with banks, and the inter connectivity can be hard to map, reflecting the recent incidents.

And the New York Fed updated the Underlying Inflation Gauge:

• The UIG “full data set” measure for March is currently estimated at 4.3%, a 0.5 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for March is currently estimated at 3.6%, a 0.3 percentage point decrease from the current estimate of the previous month.
• The twelve-month change in the March CPI was +5.0%, a 1.0 percentage point decrease from the previous month.
  • -For March 2023, trend CPI inflation is estimated to be in the 3.6% to 4.3% range, a lower and slightly narrower range than February, with a 0.3 percentage point decrease on its lower bound and a 0.5 percentage point decrease on its upper bound.

PerpetualDiscounts now yield 6.24%, equivalent to 8.11% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.95% on 2023-4-6 and since then the closing price has changed from 15.32 to 15.25, a decrease of 46bp in price, with a Duration of 12.42 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 4bp since 3/31 to 4.99%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to about 310bp from the 305bp reported April 5.

Pablo Hernández de Cos, Governor of the Bank of Spain, gave a speech titled Latest monetary policy developments in the euro area:

We also provided more detail on what will guide our assessment of the inflation outlook and, therefore, our monetary policy decisions. In particular, we announced that this assessment will depend on three main factors. First, incoming economic and financial data. Second, the of underlying inflation dynamics. And lastly, the strength of monetary policy transmission.

I will now elaborate on these three factors.

The first is our assessment of the inflation outlook in light of the incoming economic and financial data. This assessment will be informed primarily by our staff macroeconomic projections, on which all data are incorporated in a coherent manner.

In this regard, the staff March forecast pointed to a weakening of activity in 2023, with real euro area GDP expected to grow by 1% in 2023 (compared with 3.6% in 2022). This scenario is somewhat more optimistic than that of the previous projections (published in December), reflecting better than expected recent economic data and the fall in the cost of energy, so that real income losses are lower. Growth is expected to pick up, to 1.6%.
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Headline inflation is expected to remain high for the rest of 2023, albeit on a downward path that will take it to 2.8% in the last quarter of the year. This drop in inflation is mainly explained by the energy component, while underlying inflation is expected to remain elevated. Specifically, the ECB projections point to inflation averaging 5.3% in 2023, before decreasing to 2.9% in 2024 and to 2.1% in 2025. This downward trend would be underpinned by the gradual disappearance of upward pressures from the reopening of the economy, previous supply-side shocks (supply bottlenecks and high energy prices) and euro depreciation, reinforced by increasing pass-through of the recent fall in energy prices and exchange rate appreciation. The fall in inflation in the medium term is also explained by a moderation in domestic demand pressures, owing inter alia to increasing dampening effects of our monetary policy decisions.
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A third element that adds a certain degree of complexity to the inflation outlook relates to fiscal policy. In 2022 and 2023, euro area countries significantly increased their fiscal policy support measures to protect businesses and households from rising energy prices and inflation, bringing the total gross stimulus to close to 2% of euro area GDP in both years. While these measures helped to contain inflation in 2022 and are expected to do so in 2023, the extent of their impact this year is still uncertain. And the withdrawal of these measures will push consumer prices upwards in the coming years, especially in 2024.3 In this regard, it is important to stress that, in the current high inflation setting, an appropriate policy mix requires a fiscal stance that, at the aggregate euro area level, is not at odds with the tightening of our monetary policy. This means that government support measures should be temporary, targeted and tailored to preserving incentives to consume less energy, and they should be gradually rolled back as energy prices fall. Otherwise, we are at risk of driving up medium-term inflationary pressures, which
could call for a stronger monetary policy response.

Jobs, jobs, jobs (US Version)!

The economy in March continued its descent from dizzying heights, with employment growing at a healthy rate but one that nonetheless signifies employers are pulling back as steadily rising interest rates take their toll.

Employers added 236,000 jobs last month, the Labor Department reported on Friday, while the unemployment rate decreased to 3.5 percent, from 3.6 percent in February.

The range of industries beginning to fade has widened, as warehousing, retail, manufacturing, construction and financial activities — those more sensitive to borrowing costs — either lost jobs or stayed flat over the month.
…

• Year-over-year growth in average hourly earnings slowed slightly in March, to 4.2 percent, a sign the Federal Reserve has been looking for as it seeks to quell inflation. The report reflected a labor market that is gently decelerating, a sign of the kind of soft economic landing that the Fed has been shooting for.
• The U.S. labor force added nearly half a million workers in March and the share of Americans considered in their prime working age rose to 80.7 percent, the highest rate since 2001. So much for “nobody wants to work anymore.”
• The report delivered welcome news for President Biden, who has said that the job market needed to cool to tame high inflation. But analysts warn that the outbreak of banking sector turmoil means that the coming months could bring a more rapid deceleration in hiring.
• Bond yields jumped in response to the fresh data, as investors added to bets that interest rates would rise. Stock markets were closed on Friday for the Easter holiday but the bond market opened for a shortened session, during which yields continued to record unusually big swings.

So this year’s tussle is between the economists and the players! Who will win?

The Bank of Canada will keep its key interest rate steady at 4.50 per cent through 2023, according to most economists polled by Reuters, with an even smaller minority now expecting an interest-rate cut by year-end than a poll taken a month ago.

Markets still expect more than 50 basis points of cuts, pricing fuelled by fears last month over stresses in the U.S. and European banking sector, despite Canada’s economy and labour market performing better than expected.
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In March, the BoC was the first major central bank to stop its aggressive hiking cycle and is on what it calls a conditional pause. So all 33 economists polled March 31-April 6 said it will hold its overnight rate at 4.50 per cent on April 12.

A majority of forecasters, 23 of 31, said the rate would remain unchanged for the rest of 2023. Only seven expected at least one 25-basis-point rate cut by end-year, down from 13 in a survey taken about a month ago.

The IMF has released its Global Financial Stability Report which includes a chapter on Geopolitics and Financial Fragmentation: Implications for Macro-Financial Stability:

Rising geopolitical tensions among major economies have intensified concerns about global economic and financial fragmentation, which could have potentially important implications for global financial stability. Fragmentation induced by geopolitical tensions could affect the cross-border allocation of capital, international payment systems, and asset prices. This could pose macro-financial stability risks by increasing banks’ funding costs, reducing their profitability, and lowering the provision of credit to the private sector. Greater financial fragmentation could also exacerbate capital flow and macro-financial volatility by limiting international risk diversification. Policymakers need to be aware of potential financial stability risks associated with a rise in geopolitical tensions and assess and quantify geopolitical shock transmission to financial institutions. Financial institutions may need to hold adequate capital and liquidity buffers against rising geopolitical risks. The global financial safety net also needs to be buttressed through adequate levels of international reserves held by countries, central bank liquidity swap arrangements, and precautionary credit lines from international financial institutions.

One grudge the private-school boys at the major dealers have against market-making hedge funds is that they pull their capital out of the market when things get hairy. So, it turns out, do private mortgage lenders:

Private mortgage lenders are refusing to renew loans to their existing borrowers, leaving indebted homeowners without a source of funding.

Canadian Mortgages Inc., CMLS Financial, New Haven Mortgage Corp. and individual private lenders are some of those who have turned down requests to renew some of their borrowers’ loans after home prices tanked over this past year.

This is taking place in areas where home prices have dropped significantly. That includes Owen Sound, Bowmanville, Orillia, Timmins, Hamilton and Brampton in Ontario and Prince Rupert in British Columbia.

Private lenders are nervous they won’t be able to recoup their capital if borrowers are unable to make their monthly payments. Private lending is typically determined using a metric called the loan-to-value (LTV) ratio, which measures how much the homeowner owes relative to the appraised value of the property.
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Currently, many private lenders are only willing to lend up to 75 per cent of the property’s value – also known as an LTV ratio of 75 per cent. When home prices were soaring in 2021, private lenders were willing to offer loans with an LTV ratio of 90 per cent.

Now that home prices have dropped, that has increased the risk to the lender and they are no longer willing to renew loans. When borrowers try to renew their mortgage, the lender is either refusing to renew their loan or telling borrowers that their properties need to be reappraised. And when the property is reappraised, it has a much lower value.

The New York Fed has released its Survey of Consumer Expectations:

Inflation

• Median inflation expectations increased by 0.5 percentage point at the one-year-ahead horizon to 4.7%, marking the first increase in the series since October 2022. Median inflation expectations increased by 0.1 percentage point at the three-year-ahead horizon to 2.8%, but decreased by 0.1 percentage point at the five-year-ahead horizon to 2.5%. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) increased at all three horizons.
• Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—increased at the one-year-ahead horizon, decreased at the three-year-ahead horizon, and remained unchanged at the five-year-ahead horizon.
• Median home price growth expectations increased by 0.4 percentage point to 1.8% in March, remaining far below the 12-month trailing average of 3.0% as well as their pre-pandemic levels. The increase was most pronounced among respondents with no more than a high school education and for those who live in the Midwest Census region.
• Median year-ahead expected price changes declined by 0.1 percentage point for gas (to 4.6%), 1.4 percentage point for food (to 5.9%), 0.1 percentage point for the cost of medical care (to 9.3%), and 0.2 percentage point for the cost of rent (to 9.2%). Median year-ahead expected cost of college education increased by 0.8 percentage point (to 8.9%). All commodity price expectations remain well above their pre-pandemic (March 2020) levels.

Labor Market

• Median one-year-ahead expected earnings growth remained unchanged at 3.0% in March. The series has been moving between a narrow range of 2.8% to 3.0% since September 2021; March marked the fourth consecutive month it remained at 3.0%.
• Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased by 1.3 percentage point to 40.7%. The increase was more pronounced for respondents with at least some college education, those between the ages of 40 and 60, and those with annual household incomes between $50k and $100k.
• The mean perceived probability of losing one’s job in the next 12 months decreased by 0.4 percentage point to 11.4%. The mean probability of leaving one’s job voluntarily in the next 12 months also declined by 1.5 percentage point to 19.3%.
• The mean perceived probability of finding a job (if one’s current job was lost) declined by 0.3 percentage point to 57.6% in March. The series has been moving between a narrow range of 57.2% to 58.2% since August 2022.

Something peculiar is happening at Emerge Canada Inc.:

Regulators have slapped the entire family of exchange-traded funds from Emerge Canada Inc. with a trading halt because the company has failed to find an auditor to review its financial statements.

Toronto-based Emerge revealed in mid-December that, nearly six weeks earlier, BDO Canada LLP had resigned as the auditors of the Emerge Funds. At the time, Emerge said it was “working expeditiously to appoint a successor auditor.”

Monday, Emerge acknowledged it has yet to find a new auditor. Lacking one, it failed to file audited annual financial statements for its funds by a March 31 deadline. As a result, the Ontario Securities Commission issued a cease-trade order on Thursday for all the Emerge funds.
…
In its December 14 filing, Emerge said BDO “resigned, on its own initiative” on Nov. 3. Emerge said BDO Canada LLP had no reservations in its reports for the Emerge Funds for the two most recently completed financial years, which were 2020 and 2021. Also, there no were no “reportable events,” which are types of disagreements with auditors or other accounting issues that are defined in securities law.

The next day, in a filing to all provincial securities regulators, BDO said “We agree with the statements made in the Change of Auditor Notice pertaining to our firm.”

And we should all Raise a glass to Bing Newcomb:

Mr. Newcomb, who co-founded the company E*Trade and wrote the computer code that made it work, died on Jan. 29 at his home in Palo Alto, Calif. He was 79.
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In 1980, Mr. Newcomb and William A. Porter were introduced by a mutual friend at a Halloween party in Palo Alto. Mr. Porter, a onetime cowboy turned electronics whiz, had just purchased an Apple II personal computer, the company’s first model aimed at consumers. How, he wondered, could he and other individuals use the new technology to buy and sell stocks from home?

Mr. Newcomb, who had been working as a freelance computer programmer, hiring himself out to banks and other businesses that needed a guide to emerging digital technologies, provided the answers.

In 1982, with $15,000 in capital, the partners started TradePlus, one of the first electronic trading platforms. Its first trade was made on July 11, 1983, by a Michigan dentist.
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By 1994, revenues had risen geometrically, from $850,000 only two years earlier to nearly $11 million. A business journal proclaimed the firm to be the fastest-growing private company in Silicon Valley. It went public as the E*Trade Group in 1996.

Mr. Newcomb, who had been the company’s chief system architect and vice president for research and development, retired with 2.4 million shares of the company in 1997, when the price per share was about $23.